Franchises do NOT have
a better chance of success
"Franchises Have A Better Chance Of Success": (False)

There's a longstanding myth about franchises:
"Franchises have a great chance of success", or
"Franchises have a better chance of success than non-franchises".

        It's a lie.

The following is excerpted from a 1995 study byTimothy Bates, a professor at Wayne State University, who studied Census Bureau data on 20,000 new enterprises and found that 38 percent of franchises failed within four years of opening their doors, vs. 32 percent of independent start-ups that went belly-up.

A recent ad in Business Week succinctly states the conventional wisdom on the risk involved in entering self-employment by purchasing a franchise: "A franchisee has a four times greater chance to succeed than an entrepreneur who launches a new independent business."

The franchise, we are told, is a safe bet. However, findings of this study indicate that young franchise startups exhibit both higher rates of firm discontinuance and lower mean profitability than cohort independent business startups. When owner and firm traits are controlled for statistically in logistic regression, the franchise characteristic is found to be negatively related to firm survival prospects. These findings are based upon analyses of approximately 20,000 young small businesses, utilizing nationwide data compiled by the U.S. Bureau of the Census.

A report from the Small Business Administration says:
Although some have maintained that a franchise affords a franchisee a greater chance of success than starting a completely independent business, not all studies support that conclusion.

...Despite the popular view that franchises are much more successful than non-franchises, SBA's experience with defaulted loans does not support this. For example, the loans identified by SBA as franchise loans that originated from FY 1991 to FY 2000 actually performed slightly worse than non-franchise loans.


The International Franchise Association:
The International Franchise Association issued a letter in 2005 saying this myth should no longer be promulgated:

Franchisors who claim that franchises have lower failure rates than independent small businesses based on data from a 1987 study could be misleading potential investors, according to a letter from the IFA to its member franchises. Read more on this topic in this article from Blue Maumau.

The International Franchise Association has asked franchisors to stop spreading claims that franchises are safer than independent small businesses. The organization issued a letter in 2005 urging members to "remove from their Web sites or printed materials "any information claiming that the success rate of franchised establishments is much greater than that of independent small businesses," calling the information "potentially misleading."

The IFA sent out this letter to its members in May of 2005. Alisa Harrison, Vice President of Communications and Marketing for the International Franchise Association, on Tuesday emailed the original document and its continuing relevent message to Blue MauMau.

A message from International Franchise Association
President Matthew Shay
May 2, 2005

Dear Friends:

It has come to our attention that some IFA-member companies may be providing information about franchising that is long out of date and no longer presents an accurate picture of the sector.

Of particular concern is information claiming that the success rate of franchised establishments is much greater than that of independent small businesses.

Many years ago, the U.S. Department of Commerce conducted studies about franchising which presented such statistics. That information is no longer valid. The agency stopped conducting such studies in 1987.

We strongly urge you to remove any information from your Web site and published materials that make such a claim. The use of such data, in the absence of current research, could mislead prospective franchisees who are attempting to conduct responsible investigations.

The International Franchise Association's Educational Foundation recently released a study, The Economic Impact of Franchised Businesses, conducted by PricewaterhouseCoopers, which offers the first comprehensive view of franchising's economic impact. This study, available at www.franchise.org, contains information that could be helpful to prospective franchisees and others in determining the size and scope of franchising.

Another study available on the IFA Web site is The Profile of Franchising, which collected data over three years from UFOCs and offers data averages on such important aspects of franchising as unit turnover, initial franchise fees, initial investment levels, contract terms and renewal, royalty and advertising fees. We recommend that you review these two studies and share the information in them instead of perpetuating outdated and potentially-misleading information.

As a member of the franchising community, you serve as a gateway to future generations of franchisees and entrepreneurs. Please join IFA in making an effort to present an accurate picture of franchising.

Sincerely,

Matthew Shay
President
International Franchise Association

Look at the facts:
New Business Failure Rate

All new businesses:
Proportion of New Businesses Founded in 1992 Still Alive By Year.
I have added red line for year 2, which shows a survival rate of about 70%


source: http://smallbiztrends.com/2008/04/startup-failure-rates.html


 

 
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